8 Warning Signs to Know if You are Heading for a Cash Crunch

The 2nd most reason why 99% of startups fail is “Ran out of cash”.

We dig through the reasons and see what we found out. Check if your company is showing any of these indicators and take help to get out of it.

Two broad signs might warn you that your business is heading for a cash crunch.

Business Reasons:

Business is growing too fast

Yes, you heard it right. A business that is growing too fast may seem to be a positive factor. However, in reality, it has its complications. A business that is growing faster than what was expected and planned for could result in serious cash problems. This could result in a cash crunch in case the growth in the business expenses as a result of increased growth cannot be accommodated by the growth in business income ie., profits.

Margins are shrinking

Shrinking margins are red signals which indicate that your business is not definitely on the right path. Keep track of your margins and check for any adverse changes. Conduct a line-by-line analysis of each item of your income statement. This will provide you with a deeper insight into the costs and profits and the degree of impact.

The Sales pipeline is drying up

A drying-up sales pipeline is a warning sign that you might be heading toward a cash crunch. This in turn means falling revenues which will ultimately affect your profitability and cash situation. Make sure to manage your sales pipeline effectively or take the help of a CFO partner.

You don’t monitor business cash flows

One of the sure signs that a business might be heading towards a cash crunch is that you don’t monitor your business’s cash flow regularly. Businesses should always try to stay on top of their cash flows, to avoid any uncertain circumstances. The frequency with which the business should monitor the cash flows could vary from business to business depending on the financial planning in place in the organization. A virtual CFO partner could help you in staying on top of your cash flows and make sure that your business doesn’t head toward a cash crunch.

Financial Reasons:

Customers don’t pay on time

If a business pays its payables on time or even earlier and fails to receive payments from its customers promptly, that could lead to a cash crunch. You should keep track of their receivables and take necessary steps to ensure timely payments. Managing receivables efficiently could help your business to stay out of a cash crunch.

You are not paying GST, or TDS on time

One other sure sign that you are heading towards a cash crunch could be that you aren’t paying up our GST, TDS, and other such tax obligations on time. It is vital for a business to keep track of the same and make sure these tax obligations are paid promptly. It’s always better to not use the funds allocated to satisfy tax obligations for contingency purposes.

No cash reserves for a rainy day

Modern-day businesses are extremely uncertain. Times like these have highlighted the importance of being agile and forward-looking. It is indispensable for your business to maintain adequate cash reserves so that you can fall back on them in case of emergencies.

You are drying up your working capital limits

Effective working capital management is extremely vital for avoiding a cash crunch situation. Improper management of working capital and exceeding the working capital limits could result in a liquidity crisis. Take the help of a CFO partner to help manage your working capital.